For fashion retailers, speed and flexibility are increasingly important. Instant gratification has become the norm and clothing retailers are in a race to bring the latest trends to market. As a result, traditional bulk, bi-annual ordering is being replaced by regular, small batch replenishment. We examine why the accompanying quick response manufacturing (QRM) has been slower to take off in South Africa and the implications for local fashion retailers.
The fashion buying cycle
The success of fashion retailers is determined by their ability to accurately predict which colours, fabrics, prints and garment styles are likely to be popular ahead of actual demand. Buyers for local fashion retailers travel to Europe and America to attend fashion shows, visit stores and select samples. Combining this research with lessons learnt from previous seasons, local retailers design their range and place orders with suppliers.
To minimise costs, the fashion buying calendar traditionally ran over a six to nine-month period with only two major planning cycles a year. Bulk orders were placed well in advance, but long lead times resulted in very little flexibility for these retailers to react to changing customer preferences once the season had begun.
The rise of fast fashion has placed this model under pressure. As fashion buying cycles worldwide have shortened and social media has made it easier to identify the latest global fashion trends, local consumers have come to expect more than last season’s winners from the Northern Hemisphere. The entrance of international fashion brands, such as Zara and H&M, has placed further pressure on local fashion retailers to refresh their offering more frequently. However, shortening the buying cycle is not a simple task.
Zara’s success with quick response manufacturing
QRM is the process of producing smaller batches more frequently – where speed and adaptability is prioritised over cost. Zara is considered to be the most successful global example of quick response retail (as indicated below) and has become renowned for the speed at which they are able to execute on the latest fashion trends. Products tend to sell out before demand peaks, incentivising their customers to visit stores more frequently to
avoid disappointment.
The key to Zara’s success involves vertical integration across the value chain, from design through to end distribution into stores. Core manufacturing facilities are located close to their distribution headquarters in Spain, allowing for the flexibility required to introduce new designs to stores around the world twice a week. It takes Zara less than two weeks to identify a new trend and to have their own interpretation available in the majority of their stores worldwide.
However, even for a leading fast fashion retailer such as Zara, relying solely upon the QRM model does not make sense. Around 60% of all Zara products are manufactured in close proximity at a higher per unit cost. This is specifically the case for high fashion items that require speed and smaller batch sizes to maintain a scarcity element and reduce the level of markdowns needed to clear excess stock. The remaining 40% is made up of low-risk basic items that inherently follow a more predictable sales pattern. Low risk items can be ordered well in advance at a cheaper price, typically from low cost factories in Asia. The net result is an enviable long- term track record of sales growth and profitability for the brand.
The South African clothing manufacturing industry
There are structural limitations to implementing QRM in South Africa. A lack of cost competitiveness in the face of cheap imports and an absence of trade protection measures led to a sharp contraction in South Africa’s clothing and textiles manufacturing sector during the 1990s. Over the last two decades, clothing manufacturers have continued to struggle despite government’s efforts to stem the decline (chart below).
There are very few fabric mills or dye houses left in the country. As such, the bulk of material required for clothing manufacture needs to be sourced in finished product form from overseas, attracting import duties of up to 22%. When coupled with a higher cost of labour and lower order volumes, local manufacturers are largely unable to compete with Asian manufacturers on cost. The sale of illicit imported clothing, upon which no duty has been paid (or the value has been understated), places additional pressure on retail pricing – further impacting local manufacturers’ ability to compete.
Declining industry profitability and scale has led to a lack of investment and a resultant loss of valuable skills. Consequently, the competency gap relative to international manufacturers has widened over time. Local manufacturers generally lack the skills and machinery required to make technical pieces, such as those involving beadwork, or to work with more complex fabrics. For example, winter jackets and denim clothing are almost exclusively imported. In short, the range of clothing that can be produced at scale in South Africa, is limited, particularly that which is made using locally produced fabric. Therefore, even when local manufacturing is possible, fashion calls regarding the fabric to be used, largely need to be made well ahead of the season.
Despite these challenges, the benefits of increased flexibility to adapt to changing trends in-season has begun to outweigh the additional cost involved. Although unit costs may be higher, smaller order volumes reduce the amount of excess stock at the end of season that needs to be sold at marked down prices. Therefore, on a net basis, profitability can be higher.
To own or to partner?
The Foschini Group (TFG) is the only local fashion retailer that is substantially vertically integrated into manufacturing. Around 32% of TFG Africa’s apparel is manufactured locally, with 22% produced by their own TFG Design and Manufacturing supply chain. Their average lead time is six weeks and in-season replenishment can be achieved within three weeks. The amount of apparel they will manufacture in South Africa is expected to
almost double over the next five years, with QRM as a proportion of own manufactured apparel increasing from 66% to 100% over this period. In order to achieve this, TFG has committed to investing a further R1 billion into local manufacturing.
Although Truworths, Mr Price, Woolworths and Edgars each source a proportion of their product locally, they all rely on third party manufacturing relationships. Truworths has the highest proportion of locally manufactured clothing (around 50%) and has been actively working with its South African supplier base to improve QRM. By sourcing locally, Truworths’ design team can make colour and styling changes up to four weeks prior to delivery, although typically this occurs around 8-10 weeks prior. In-season replenishment can be achieved within 3-4 weeks.
Vertical integration may not be the only answer, but it certainly appears to be paying off for TFG (chart below). Over the past couple of years, TFG’s South African operations have gained market share and achieved sales growth ahead of competitors, while gross profit margins have been on the rise. This implies that they are doing a better job (relative to their competitors) in tailoring their offering to actual consumer preferences.
What lies ahead
Ultimately, by forcing retailers to increase their proportion of locally sourced product, the shift to fast fashion and the resulting need for QRM capabilities could prove to be the saviour of the South African clothing manufacturing industry. Over time, technological advancements have the potential to bridge the skills gap, thereby further improving the attractiveness of local production, provided there is sufficient investment over the medium term. Through the development of a clothing and textile masterplan, government, trade unions and the private sector are actively working together towards this common goal. This presents a genuine opportunity to increase the relevance of local manufacturing going forward and improve the performance of those retailers who successfully embrace this opportunity.
